UOB - Lagging its peers

Expect NIM to hold up, even as bank remains selective in lending. We expect NIM to hold up as loans get re-priced at higher yields. We sense that UOB remains selective in lending. It aims to grow its Singapore loan book to take advantage of rising loan yields, but remains cautious in expanding regionally. Meanwhile, its loan portfolio margins remain competitive and interbank rates remain low. As such, there will be little upside to NIM. We are retaining our loan growth assumption of 6%.

Stabilising indicators. We note that NPLs have stabilised, but the extent of the recovery remains uncertain. There are still risks from smaller SMEs, which mean NPLs could still rise but not spike up sharply. UOB has increased its general provision reserves to provide buffer for uncertain times since the previous financial year. While prudent, it did dent its ROE for FY08 and would, to some extent, limit its ROE expansion for FY09.

Nevertheless, we expect a normalisation of ROEs for FY10. Laggard among Singapore banks. UOB had underperformed its peers and the market, due to the impairment to its book value back in 4Q08. It, however, should be able to steer away from this setback now, given that credit markets have stabilised. Our TP of S$16.50 is based on the Gordon Growth Model implying a 1.6x FY10F P/BV, which is the normalised mid-cycle multiple.

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